An Owner’s Guide to Retainage Basics for Construction Projects in Tennessee

Retainage is an important component of commercial construction projects, and a good understanding of any retainage-related issues can give you significant leverage over contractors while the work is being completed. That being said, it's important to note that as an owner or developer, you face significant exposure if retainage is mishandled. For reference, retainage issues for Tennessee construction projects are governed by the Tennessee Prompt Pay Act. In Part One of this series on retainage, I'll address some of the common questions owners may have surrounding retainage and discuss why it's important to know how Tennessee differs from other states.

• In Tennessee, am I required to withhold retainage?
  Unlike some states, you are not required to withhold retainage on Tennessee construction projects. Under the Prompt Pay Act, "[a]ll construction contracts on any project in this state, both public and private, may provide for the withholding of retainage." So, while it typically is beneficial to hold back retainage as leverage to ensure that the contractor completes the work, it is not required under the Prompt Pay Act.
• How much retainage am I allowed to withhold?
  If you do withhold retainage, "the retainage amount may not exceed five percent (5%) of the amount of the contract." Typically, owners withhold 5 percent from each progress payment for the duration of the project. However, the withholding schedule can vary, as long as the retained amount does not exceed 5 percent of the total amount of the contract. For example, you could withhold 10 percent until the project is 50 percent complete, and then not withhold any amounts for the remainder of the project. This would equate to 5 percent of the total contract amount being withheld, which would be permissible under the Prompt Pay Act. But if you hold too much retainage, the penalties are rather severe, because (1) it's a Class A misdemeanor criminal offense; (2) you are subject to a fine of $3,000 per day, with each day being considered a separate offense; and (3) it requires restitution of the retained funds.

In summary, while the withholding of retainage is a central issue for commercial owners and developers across the United States, those operating in Tennessee should pay close attention to these two key takeaways: 1) withholding retainage is not mandatory, and (2) if retainage is withheld, the amount cannot exceed 5 percent of the total contract amount.